An informed and thought-provoking analysis of what lies behind the headlines and headaches of business ethics and corporate social responsibility

Wednesday, November 26, 2008

Bailout – Who’s next?

So, you know by now that a little ‘Obamania’ has also infected Crane and Matten. But why not enjoy the honeymoon while it lasts. It might be over sooner than later. Among the many daunting tasks the new administration will have to face – the economy, Iraq, Afghanistan, Guantanamo, foreign relations – one of the most difficult animals for Obama to tame reared its ugly head last week: the American auto industry.

Now it makes perfect sense that at a time when Washington is handing out blank cheques to troubled banks, Detroit’s CEOs thought it worth a try to get next in line. And in fact their companies are in dire straits. Poor quality, fierce competition from the Far East and Europe, bad environmental performance of their products, high healthcare costs – these are just some of the issues which have led to the current situation. None of which is really new and good management could have addressed these problems years, if not decades ago.

But the appearance of the CEO’s of the big three on Capitol Hill last week points at a bigger issue Obama will have to face. It is good to see this in a broader context and to pull Stan Luger’s brilliant analysis of ‘Corporate Power, American Democracy, and the Automobile Industry’ from the shelf again. The book analyses the influence on political decision making by the US car industry over most of the 20th century. It puts the recent efforts of the industry in the context of longstanding direct political intervention, lobbying and coalition building.

Last week’s events then point to one of Obama’s biggest challenges, to deliver on bringing ‘change’ to Washington. And for a democrate President, this is no easy task. After all, car companies still are massive employers. Michael Moore’s ‘Roger and Me’ showed years ago what happens to towns in America’s industrial heartland when car companies close shop. In that sense then Obama’s success will in some way depend closely on creating jobs – which in fact is one of his big promises.

Here is the tricky bit: the political power of business in modern democracies is more than just lobbying or other ways of direct influence. In his book (p. 25) Luger quotes the sociologist Claus Offe on this point:

‘The entire relationship between capital and the state is built not upon what capital can do politically via its association […] but upon what capital can refuse to do in terms of investment.’

So every politician needs business to thrive and to invest in order to secure jobs and tax revenue. To deal then with this crucial contribution of business from the political end is a much more complex job for Obama than it seems.

In this sense, with the bailout of the banking industry and potentially others we might witness a watershed in contemporary capitalism: a return of the government as a key player in business. The last three decades have seen the exact opposite with most governments privatizing large parts of the public service delivery and divesting from their business interests. In some ways the bailouts then might even have this one positive effect: corporations apparently have such an importance for the wellbeing of a society that the government has to ‘rescue’ them in a situation where their survival is threatened. Acknowledging this, and granting the government a controlling stake in these companies might actually reverse one important trend of the last years. Rather than accepting a growing influence of business on politics we might actually see the reverse: that we as citizens, represented by democratic governments, regain control of a corporate world which for too long has put shareholder’s and manager’s interests ahead of many legitimate interests of wider society.

Now that sounds a bit like a utopia. And the perspective of more governmental influence on corporations will make most hard nosed business people cringe – isn’t that what socialism was about? Not quite – but anyway: it is essentially what banks and automakers in the US and elsewhere are currently asking for!

2 comments:

While you are indulging in utopian speculation, I have a couple of questions:

1) In its summary and recommendations on the G20 heads of state meeting, the Bretton Woods Project recommends "closing tax havens." (See links here) That was a live issue on both the left and the right until about a year ago; then people started talking as if the OECD guidelines were going to save us all. Your thoughts about that?

2) Don't we have to ask how corporations got their power in the first place? Doesn't the legal fiction that they are "natural persons" give them--in addition to the economic power that they already have--all the powers that are supposed to belong to individuals as well? Who would choose to be just an individual or just a corporation as long as they have the opportunity to be both? Shouldn't corporations have to be licensed or chartered by national governments wherever they operate?

3) We all need for the right kinds of business (and government) to thrive. Now is a good time to negotiate what we really need from both. I am not opposed to government intervention, but I am opposed to bailing out the auto+gas industry. This is the chance of a lifetime to address climate change and possibly some of the other urgent environmental market failures facing the planet. If the auto+gas industry was capable of solving climate change, why didn't they do it 50 years ago? 10 years ago? last year? These are not rhetorical questions. There are real and not-so-obvious answers to them.

To your points, off the cough:1. We thought the G20 thing was just symbolic anyway. ‘Tax havens’?????!!!! is that what caused the mess? Hardly. We think this G20 meeting was mostly ceremonial. Bush is the lamest duck of all lame ducks – and that’s why it was just bullshit. The thorny nettle to grasp for all governments of industrial nations is: what is their new role. The old deregulation model of the last 30 years has run into the wall. What will replace it? We dunno. Watch this space!2. Spot on. Joel Bakan in the book/film ‘The Corporation’ made this point years ago. How corporations are chartered and in whose interest they should be run – this has to be addressed. If government comes in as a ‘shareholder’ – in our view the second best option. But at least an improvement to just having ‘artificial persons’ enjoying some rights of individual persons without the concomitant responsibilities to wider society – you’re right. Not a good idea.3. Agree. we would see governmental loans, with tough conditions for the auto industry in terms of fuel consumption of the fleet, conditions for employees, executive pay etc. same for the banks. In Europe, some governments just gave loans to address individual mortgages of ‘normal people’ rather than a blank cheque to blow off at executive retreats AIG-style…4. I am afraid so. Obama depends on jobs. These companies would have such a massive effect on jobs that to let them go bust is just not an option. This puts them in a position to be treated in a way beyond what legal frameworks would normally suggest. That was kind of the point of the blog.

Anyway, thanks so much for engaging with our rumblings. Much appreciated!C&M

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Andrew Crane [L] and Dirk Matten [R]

Welcome to the Crane and Matten blog - for informed commentary and expert analysis on the everchanging world of corporate responsibility.

We are two business school professors best known for our books and research articles on business ethics and corporate citizenship. We wrote the Crane and Matten blog from 2008-2015, offering unique insight on a range of issues from across the globe.

Andrew Craneis Professor of Business and Society in the School of Management, University of Bath.

Dirk Matten is the Hewlett Packard Chair in Corporate Social Responsibility in the Schulich School of Business, York University.